How Nirav Modi killed his golden goose

Not so long ago, India’s diamond trade had a sense of respectability around it. In the early 90s, the export of rough and polished diamonds brought in over $3 billion in foreign exchange, next only to the garments and clothing sector. Software exports were not even $200 million. In those days when foreign exchange was a rarity, diamond businessmen, who bought in dollars, were treated with kid gloves.

Being such a big and important business, you would expect bankers making a beeline to lend to diamond entrepreneurs. After all, there were the stones as collateral, and exports were always against LoCs, or (Letters of Credit) which guaranteed payments to them.

In reality, banks were wary to lend to diamond companies. Exporting diamonds was considered a second-rate business by them. To export $3 billion worth of diamonds in 1991, diamond companies imported uncut stones worth $2 billion. The textile industry, on the other hand, imported raw material worth only $246 million to export goods worth $3.77 billion. In short, the import intensity of the diamond industry was very high and not so productive in terms of value addition.

How diamond entrepreneurs functioned didn’t help the case either. Rough stones needs to be cut and polished to make the final product. Banks issued loans on the basis of the percentage of recovery from an uncut stone, usually 60%. For a long time, businesses reported just 30% recovery. They bribed their way through bureaucracy (mostly customs). A poorly paid bank official or manager hardly stood a chance against the pressure businesses could bring if needed.

Pancharatna in South Mumbai, till recently the biggest diamond-trading building, was built on the foundation of irregularities. It was not fire compliant, and many firms had mortgaged the same offices to multiple banks to take loans. It was an easy hunting ground for civic authorities looking to extract money from errant companies. For bankers, dealing with diamond traders was lucrative, but very risky. So, most banks had designated branches that would specialise in lending to diamond companies and the officers in these branches learnt to grade stones and knew the tricks in polishing. Yet they remained wary of the trade.

However, diamond businessmen badly needed banks: Firstly, banks’ interest rates were much lower compared to trade loans that would charge 50% more interest; secondly, and more importantly, a bank loan was a tacit endorsement of the business’s legitimacy.

It is in that light, journalist Pavan Lall’s book, Flawed, on Nirav Modi, the fugitive Indian diamantaire who caused a $2 billion-plus loss to government-owned Punjab National Bank, stands out. For the first time, there is a story that takes you inside the offices of a diamond jeweller and details out how machinations inside worked in perpetrating a crime sans pareil in Indian economic history.

Modi and his uncle and mentor Mehul Choksi were an aberration in the industry, which associated publicity with failure and income tax raids. Choksi hired top Bollywood actresses as brand ambassadors. Modi, who never rubbed shoulders with the rest of the industry, led a jet-setting lifestyle, inspiring awe in even the biggest diamond exporters. What has Modi done that we do not know about?

Lall explains in detail Modi’s style and his one-pointed mission to be the top globally acclaimed jeweller. There isn’t much on how Modi arrived at his goal, but Lall takes you through the myriad moves Modi makes to get his stores up and running in some of the most exclusive retail locations in the world. Readers get a ringside view of how to build a global business quickly.

Throwing light on the choices Modi made, his fetish for tea, his focus on quality and the choice of people who would shoulder his dream, Lall paints in his book a picture of a man who seemed to plan every facet of his character, just as he burnished his exquisitely cut stones that sold for millions of dollars.

But, the most important part of the book, I reckon, is the way Modi ‘handled’ Punjab National Bank, the bank he swindled. Details on Modi’s actual relationship and dealings with the bank are very sketchy as just a handful of the bank’s personnel were actually involved in the scam. When Lall started his research for the book, nearly all of them were behind bars. For example, we don't know how a bank employee met with Modi's men regularly in his office without being detected.

Modi and the bank personnel had figured out a modus operandi to beat the system and get loans from other overseas banks without that reflecting in the books of PNB, which underwrote all the loans. Over the years, PNB had underwritten over $4 billion in loans but eventually it was duped for only $2 billion. In other words, Modi had taken loans and continued to repay them on time so that he was not caught. But, eventually as his international businesses never took off and he had blown a lot of money in marketing, his edifice crumbled.

Lall, however, makes up with abundant information on the money trail and the schemes that Modi and his team used to get money from banks. Each diamond stone is different but that never stopped diamond companies to export the same stone several times and get bank loans against it.

Flawed shows you how the industry does things, but elaborate listing of several such transactions will make the book a difficult read for someone who is not financially adept. Except for that, the book is interesting and informative. It expounds the generic nature of the Indian diamond and why the export business has lost its sheen in recent years. It also talks about what to expect from companies and entrepreneurs who want to make an international splash as India’s economy grows.